ECB: Draghi to hold the line on dovish policy outlook - AmpGFX

According to Greg Gibbs, Director at Amplifying Global FX Capital, headline inflation has jumped sharply to surpass the ECB’s medium-term target for the first time since Jan-2013 which may be generating some thoughts of a less dovish ECB statement on Thursday.

Key Quotes

“The outlook for the Eurozone economy has improved with business confidence surveys at multi-year highs and a stronger global backdrop; important for the Eurozone given its relatively high share of exports in GDP.”

“Headline inflation has jumped sharply to surpass the ECB’s medium-term target for the first time since Jan-2013.  This may be generating some thoughts of a less dovish ECB statement on Thursday.  However, the ECB still has nine months to go on its current asset purchase plan and is under no pressure to provide further guidance until later in the year. There has been no pick-up in core inflation from 0.9% last year, still well below target.  Substantial spare capacity and headwinds from banking sector balance sheet repair remain.  Credit growth has continued but only at a modest pace. The outlook has improved, but the risks remain high; including Eurozone political risk, Brexit negotiations, Greek debt talks and US government policy uncertainty.”

“The ECB must weigh the odds that the USA imposes a border tax or pursues protectionist policies that threaten to disrupt the outlook for global trade.  As such, we still expect Draghi to state that there is scope to expand and extend the asset purchase plan if the outlook deteriorates.  The EUR has weakened in-line with a stronger USD in the last week, although it has out-performed most other currencies as French political risk has eased.  The path for the Eurozone’s return to balanced growth and sustainable 2% inflation remains long and uncertain. Extreme policy easing in the ECB, combined with rising rates in the USA, should push EUR to new lows in coming months.”